Onshore FX and bond markets have stabilised on the back of a correction in global oil prices, although scale of gains has been measured. Sentiments also benefited from the government’s moves to improve banking system liquidity to encourage credit growth and a decision to scale back allocations towards the flagship meals programme. Belly to long-end bond yields are off their highs, but stayed above 7% this week, lending a flattening bias to the curve. SRBI rates have also steadied at elevated levels. USD/IDR broke below 18000, although ran into buyers at sub-17850, which has led the currency to maintain its position as the regional underperformer. BI’s stricter FX management measures came into effect yesterday. Equity markets received a temporary reprieve from the MSCI’s decision to retain Indonesia at emerging market status, although volatility is set to rise ahead of the November review. Foreign interests have returned to IDR bonds (12.7% share in outstanding; turning net buyers YTD and in June), although flows remain tepid in equities. More constructive commentary from the domestic authorities/ regulators and scaling back of US tightening expectations are required to open the room for a rally in the IDR and for the 10Y yield to decisively break below 7%.
Incoming high-frequency data reflected the lagged impact of high oil prices in 2Q26. June inflation rose to 3.3% yoy towards the higher end of the target range and in line with our forecast. Core inflation ticked up to 2.8% vs 2.6% in Apr. Food and passenger transport segments added to the headline, reflecting the rise in staples (rice, cooking oil, shallots etc.), pass-through of higher unsubsidised fuel prices, gasoline, and airfares. Widely used subsidised fuel variants have been held unchanged, which has capped fuel, transport, and utilities. Overall inflation profile is still benign and within target, suggesting that further policy tightening is more likely to be driven by financial market volatility than by domestic price pressures. The goods trade balance swung to a USD1.6bn deficit in May, the first monthly shortfall in over six years, driven by a 70% yoy surge in oil and gas imports alongside firm non-oil and gas purchases. Absence of domestic fuel price adjustments to curb demand, coupled with elevated global oil prices and a weaker rupiah, weighed on the trade balance. Exports fell by 5% yoy, led by weaker palm oil, iron and steel, and machinery shipments, although nickel exports remained resilient. De-escalation in geopolitical tensions triggered a sharp correction in oil benchmark prices in June, which should ease terms-of-trade pressures from 3Q onwards.
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